External Sector: FDI, FPI & BoP — Set 7

Correct Answer: B. B. Depletion of forex reserves to critically low levels (less than 2 weeks of imports), current account crisis

India's 1991 BoP crisis was triggered by multiple factors: rising oil prices (Gulf War 1990), remittance disruption (NRI withdrawals), large fiscal deficit, and loss of confidence. India's foreign exchange reserves fell to levels sufficient for barely 2-3 weeks of imports — a critical situation. India pledged 67 tonnes of gold as collateral to the Bank of England and IMF to get emergency loans. The crisis triggered India's landmark economic liberalization, including exchange rate devaluation, removal of industrial licensing, and opening to FDI.

Correct Answer: B. B. Services exports under 'Computer services'

India's software (IT) exports — including software products, IT-enabled services, BPO, and related services — are classified under Services Exports in the Current Account of India's BoP, specifically under the 'Computer Services' category (in IMF's Extended Balance of Payments Services classification). India is the world's leading exporter of computer services, contributing over $200 billion annually and generating a large surplus in India's services trade balance.

Correct Answer: B. B. Managing exchange rate volatility, not targeting a specific exchange rate level

RBI intervenes in the foreign exchange (forex) market primarily to smooth excessive volatility in the exchange rate — buying dollars when the rupee is appreciating too fast and selling dollars when the rupee is depreciating sharply. RBI does not target a specific exchange rate level (which would imply a fixed peg). The goal is an orderly forex market that reflects fundamentals while preventing disruptive swings. Excessive volatility harms exporters, importers, and investors who need exchange rate predictability.

Correct Answer: B. B. Domestic capital going abroad (often to Mauritius or other tax havens) and returning as 'FDI' to exploit tax benefits

Round Tripping in FDI occurs when domestic capital is sent abroad (often to countries with double taxation avoidance agreements like Mauritius, Singapore, or Cyprus) and returns to India disguised as Foreign Direct Investment, enabling the original domestic investors to exploit FDI-related tax treaty benefits (capital gains exemptions, dividend distribution tax waivers). India has tightened treaty provisions (Mauritius DTAA amendment, GAAR implementation) to prevent treaty shopping and round tripping.

Correct Answer: B. B. India-Mauritius DTAA allowed capital gains tax exemption for FDI routed through Mauritius

Mauritius was historically the largest source of FDI into India (in official statistics) due to the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which exempted capital gains from being taxed in India on investments routed through Mauritius. This led to treaty shopping — investors from third countries (including round-tripped Indian capital) routed investments via Mauritius. India amended the DTAA in 2016 to remove capital gains exemptions from April 2017, significantly reducing this tax arbitrage.

Correct Answer: B. B. Around 1.8-2%

India's share in global merchandise (goods) exports is approximately 1.8-2% (as of 2022-23), making India the 17th or 18th largest goods exporter globally. This share, while growing, remains modest relative to India's economic size. In contrast, India's share in global commercial services exports is higher at around 4-4.5%. Increasing India's merchandise export share to 3.5-4% by 2030 is a key policy objective, reflected in the Foreign Trade Policy 2023.

Correct Answer: B. B. $2 trillion by 2030 (goods + services combined)

India's Foreign Trade Policy 2023, released in March 2023, sets an ambitious target of $2 trillion in total exports (goods + services combined) by 2030. This would require approximately doubling exports from current levels. The FTP 2023 focuses on: increasing FTA utilization, promoting districts as export hubs, e-commerce exports, remission of embedded taxes (RoDTEP), SEIS for service exporters, and streamlining export procedures. Achieving this target requires sustained competitiveness improvements.

Correct Answer: B. B. A non-reciprocal preferential tariff scheme allowing Indian goods into USA at lower tariffs — withdrawn by USA in 2019

The Generalised System of Preferences (GSP) was a US trade programme that allowed eligible developing countries, including India, to export specified products to the USA at preferential (lower or zero) tariff rates on a non-reciprocal basis. The USA terminated India's GSP benefits in June 2019, citing concerns about India's market access restrictions in dairy and medical devices. The withdrawal affected Indian exports worth about $5.6 billion to the USA. India and USA have been in negotiations to revive a version of the arrangement.

Correct Answer: B. B. Indian companies setting up subsidiaries or acquiring stakes in foreign companies

Overseas Direct Investment (ODI) refers to Indian entities (companies and individuals) investing in foreign enterprises — setting up overseas subsidiaries, joint ventures, or acquiring stakes in foreign companies. Indian ODI has grown significantly, with companies like Tata, Infosys, Wipro, and Mahindra having large overseas operations. ODI is regulated under FEMA guidelines; Indian companies can invest up to 400% of their net worth abroad under the automatic route. ODI enables Indian companies to access foreign markets and technologies.

Correct Answer: B. B. Current Account Deficit as % of GDP, forex reserve adequacy, short-term debt ratio, and debt service ratio

India's external sector vulnerability is assessed through multiple indicators: (1) CAD as % of GDP (sustainable threshold ~2-3%); (2) Import cover of forex reserves (minimum 3 months); (3) Short-term external debt as % of total reserves (high ratio = vulnerability); (4) Debt service ratio (external debt payment as % of current receipts); (5) Exchange rate volatility; (6) External debt to GDP ratio. These indicators collectively signal India's capacity to withstand external shocks without a balance of payments crisis.